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07.19.12

HSBC Report Shows Difficulty of Stopping Money Launderers

HSBC's complicity in laundering money for Mexican drug cartels shows just how difficult it is to crack down on criminal cash.

"The war on organized crime relies on the premise that these are crooks and we need to put them in jail. They have guns, money. We could take the violence to new levels of cruelty, but that won't work."

In early 2010, I met with Ariel Moutsatsos, then an adviser to the Mexican attorney general, at a Sanborn's coffee shop in Mexico City. At his request, we sat behind a pillar; just weeks before, a protected witness had been gunned down in a similar spot in the Mexican capital. Moutstatsos became somewhat animated as he talked about what he saw as the future of the fight against organized crime. "What happens if we embrace a new paradigm? Instead of putting [criminals] in jail, we focus on bankrupting the business?"

We all know the images associated with the drug war—bloody corpses, bruised suspects paraded before the press, the torching of massive marijuana plantations—but we know very little about the behind-the-scenes battle against the banks. The understated element of the war on organized crime in Mexico—and in fact, around the world—has been the fight against the money launderers: the companies and banks that allow drug cartels to flood their illicit cash back into the global economy.

The money launderers are now making headlines, thanks in part to a U.S. Senate hearing held earlier this week, during which executives from the British bank HSBC were grilled for failing to stop Mexican drug cartels, subsidiaries linked to al Qaeda, and nations on the U.S. sanctions lists like Syria and Iran, from making illegal purchases and moving money into the United States.

HSBC executives admitted that a large portion of some $7 billion transferred by their Mexican subsidiaries into the bank's U.S. operation likely belonged to drug cartels. "In hindsight," said a sheepish David Bagley, head of compliance at HSBC, before resigning, "I think we all sometimes allowed a focus on what was lawful and compliant rather than what should have been best practices."

"Forget hindsight," admonished Sen. Carl Levin. "Is there any way that should have been allowed to happen?"

The short answer is no. The reality is that international institutions—and the U.S. financial sector—have long been vulnerable to money launderers, who are often several steps ahead of the authorities in their bid to exploit loopholes and weak links in institutions hellbent on capitalizing and expanding.

According to the Internal Revenue Service, the first known money-laundering investigation to reap a return was the arrest of a Hawaii-based opium trafficker on tax-evasion charges in the early 1920s (the IRS considers money laundering to be "tax evasion in progress"). The feds also got Al Capone on tax evasion. And in 1970, Congress passed the Bank Secrecy Act, which finally allowed for paper trails to be created, giving law enforcement the green light to go after the money.

Internationally, however, that chase has been fraught with tension and challenges. Every time the authorities in one country complain about another country's banking system, diplomatic issues arise.

There is growing evidence that mafias may have taken advantage of the global financial crisis in ways we have yet to fully comprehend.

Consider Mexico: In 1995, former Mexican deputy attorney general Mario Ruiz Massieu was charged with using an unidentified intermediary to move more than $9 million in suspected drug proceeds from Mexico into a Texas bank. He was arrested at Newark International Airport, and the Mexican government immediately pushed for his extradition. But the U.S. judge assigned to the case refused, saying that the country's legal system was corrupt. According to some law-enforcement officials building the case, it took a year or so to convince the Mexican government to drop the extradition request.

It wasn’t until a year later that the Mexican government would enact anti-money- laundering laws, make the practice a felony and hold its own government officials accountable for illicit enrichment. That same year, the two countries began sharing tax and financial information on suspicious transactions. And in 1997 Mexico's Treasury Dept. created regulations forcing new bank customers to divulge personal information and submit to background checks if requested.

But tensions wouldn't die down. Money laundering had now become a political issue, and Mexican and U.S. officials remained at loggerheads. In 1998 a three-year undercover anti-money laundering operation led by the Treasury and Department of Justice came to a close, having resulted in the seizure of more than $100 million, implicated more than a dozen Mexican banks, arrested 167 individuals (many of them Mexican banking officials) and proved links between Colombia's Cali cartel and Mexico's Juarez cartel.

The Justice Department boasted about the operation, which was known as Casablanca. But some Mexican officials complained that American agents had been working south of the border without their knowledge and permission—and had even violated the country’s sovereignty. Foreign Secretary Rosario Green went so far as to suggest that Mexico might try to extradite and prosecute the agents involved. "We will be firm in response to any action that injures the integrity of the nation,'" she declared.

Fortunately, cooler heads prevailed. U.S. officials admitted their mistakes, and pledged better cooperation in the future. Mexico didn't extradite or prosecute the agents involved. But some on the U.S. side saw a more ominous threat. "Without the ability to spend the profits of drug trafficking, the drug trade would come to a screeching halt," Rep. Maxine Waters (D-Calif.) told a Congressional hearing in 1998. "It is money laundering that keeps the drug trade going. We should not allow the indictment of the banks to stop at the border."

It appears Rep. Waters's warnings have not been taken seriously. The World Bank and International Monetary Fund estimate that global money laundering linked to corruption, criminal activity, and tax evasion constitutes about 3 to 5 percent of the world’s gross domestic product—or between roughly $2.17 and $3.61 trillion a year.

Over the past decade, whistleblowers have come forward, but without much success. In 2006 Martin Woods, a director of an anti-money-laundering unit for Wachovia Bank based in London, reported suspicious activity from Mexican exchange houses, known as casas de cambio. He told his superiors, as well as officials at Britain's Serious Organized Crime Agency. But he says his concerns were ignored; soon after, he resigned, claiming he was bullied out of Wachovia (his superiors say his performance was subpar).

Woods's concerns were warranted: Within a year of his raising the initial red flag, Mexican authorities raided one of the suspicious exchange bureaus, Casa de Cambio Puebla, and discovered that four drug-running airplanes had been purchased by a senior member of the Sinaloa with money allegedly laundered through Wachovia and Bank of America. The cartel member was extradited to the United States; the Casa de Cambio Puebla was shut down.

Wachovia, it turns out, had handled nearly $400 billion for Mexican currency-exchange houses between 2004 and 2007 (more than $110 million was drug- cartel money, the bank admitted). The U.S. Department of Justice slapped the bank with a $160 million fine for "willfully failing to maintain an anti-money- laundering program."

Woods was furious at his bank's failure to acknowledge the activity. "The objective was to take the proceeds out of the crime, to take away the incentive to commit the crime," he told reporters. "The fact that the money is being laundered, going back across the border, causes some of us to wonder just how close are the launderers' fingers to the trigger of the killer's gun?”

With such a broad spectrum of illicit cash to go after, perhaps it's no surprise that we often hear cries echoing those of Rep. Waters and Wachovia's Woods, but we witness a worrying lapse in memory when it comes to citing negative precedents as a guide going forward.

On Oct. 13, 2011, in written testimony to Congress, Assistant Secretary for Terrorist Financing Daniel L. Glaser highlighted the problem of the Mexican drug cartels and by name, mentioned Joaquin "El Chapo" Guzman Loera, the head of Mexico's powerful Sinaloa cartel. The Treasury Dept., Glaser testified, had been working closely with the DEA in identifying the Lebanese Canadian Bank for its role in "facilitating a narcotics and money-laundering network spanning South America, West Africa, and the Middle East." He made the usual calls for international cooperation and praised new regulations on currency transactions. But Glaser made no mention of Wachovia, what had gone wrong there, and what might be learned from the lapse in oversight.

Other government officials remain equally optimistic that the world's illicit cash can be cornered, in spite of mounting evidence to the contrary. "Legal or illegal, [the cartels] are our competitors, let's put them out of business," Moutstatsos insisted during our meeting. "We have the advantage—we are the government. It's 10 times easier for us to put them out of business."

Two years have passed since, and the Mexican government has made strides, enacting new legislation that stiffens reporting requirements for businesses, limits foreign-currency deposits and bans cash purchases of real estate. Agents from the U.S. Drug Enforcement Administration have been operating on Mexican soil, with their counterparts, in sting operations against money laundering. But once again, there have been complications: late last year, news broke that undercover U.S. agents had smuggled or laundered millions in drug proceeds, depositing cash in drug traffickers' accounts or shell accounts set up by the DEA. This was nothing all that surprising—in the early 1980s, a DEA team set up a fake banking operation in suburban Miami called Dean International Investments for the same purpose: to launder money and nab drug traffickers.

But the news of the more recent sting came at a tense time. A probe was already being conducted into the Justice Dept.'s role in the botched gun-running operation known as Fast and Furious, and Darrell Issa, the Republican chairman of the House Committee on Oversight and Government Reform, wrote to embattled Attorney General Eric Holder to press for more oversight on DEA operations.

Meanwhile, the world's mafias appear as confident as ever. Locally in Mexico, the authorities have had their hands full with even the smallest of tasks: for example, in Culiacan, the capital of the northwestern Mexican state of Sinaloa, vehicles arrive daily from the mountains at Calle Benito Juarez to change bundles of U.S. dollars into pesos at casas de cambio. Every so often, the authorities raid exchange houses in Sinaloa and shut them down. Soon enough, they either re-open due to lack of evidence of illegal activity, or the drug traffickers find new places to clean their blood money: construction companies, race tracks, art supply shops, and even day-care centers—you name it, the Sinaloa cartel has allegedly co-opted it.

Globally, the outlook is just as grim. In recent years, the Sinaloa cartel has bought up properties throughout Eastern Europe and Latin America in a bid to spread its wealth and diversify its assets. A report earlier this year by an Italian anticrime group suggested that organized crime in Italy had profited from the financial crisis by offering loans at extortionate rates. "With €65 billion in liquidity, the Mafia is Italy's No. 1 bank," said the group, known as SOS Impresa.

And there is growing evidence that mafias may have taken advantage of the global financial crisis in ways we have yet to fully comprehend. "The illiquidity associated with the banking crisis, the reluctance of banks to lend money to one another … offered a golden opportunity to criminal institutions," said Antonio Maria Costa, the former executive director of the United Nations Office on Drugs and Crime, in April. "The need for cash by the banking sector and the liquidity of organized crime created an extraordinary opportunity for a marriage of convenience.

In fact, Costa continued: “The penetration of the financial sector by criminal money has been so widespread that it would probably be more correct to say that it was not the mafia trying to penetrate the banking system, but it was the banking sector which was actively looking for capital—including criminal money —not only as deposits, but also as share acquisitions and in some cases, as a presence on boards of directors.”

Some officials continue to insist that tighter banking sector, private sector, and governmental controls could stem the tide of laundered money. But it may already be too late.

As Costa put it: "Once money enters a financial institution in a rogue jurisdiction … it can be transferred very rapidly with practically zero controls, anywhere else in the world."